MINIMUM INSURANCE LIMITS PER STATUTE

MINIMUM INSURANCE LIMITS PER STATUTE

QUESTION: To save money, can we purchase liability coverage of $1 million per occurrence with an aggregate limit of $1 million plus an umbrella policy of $1 million? An insurance agent who wants our business said this would satisfy the Davis-Stirling Act and protect owners from litigation. Our board is not convinced and would like your guidance.

ANSWER: First, a little background. Minimum insurance requirements were added to the Davis-Stirling Act after the Ruoff v. Harbor Creek decision in 1992. Ms. Ruoff, a guest of a member, suffered catastrophic injuries falling down defective common area stairs. Her husband sued the association and every owner in the association, each of whom, he argued, had common liability because they jointly owned the stairs.

The court of appeals agreed and held that every owner in the complex was jointly and severally liable for her injuries, the cost of which greatly exceeded the $1 million limit in the association's insurance policy. The case sent a chill through the industry and the Legislature responded by adding Civil Code §1365.9. The statute protects owners from individual liability, provided the association maintains at least minimum levels of insurance as follows:

• $2 million for HOAs with 100 or fewer units, and
• $3 million for HOAs with more than 100 units.

Umbrella. To answer your question, assuming your association has fewer than 100 units and assuming the $1 million umbrella is written to act as excess to the underlying $1 million general liability per occurrence, the combination of the two policies would provide the required $2 million for a single tort action brought against the association.

RECOMMENDATION: Meeting minimum levels of insurance may, however, not be enough. Even though owners are not directly liable for a loss exceeding insurance limits, they are indirectly. Assuming a $4 million judgment against an association, owners would be hit with a special assessment to make up the difference between the $2 million policy and the $4 million judgment.

Accordingly, boards need to talk to their insurance brokers to determine appropriate levels of insurance for their associations. A $5, $10 or $15 million umbrella policy is relatively inexpensive and not uncommon for associations to purchase. In addition, homeowners should individually purchase loss assessment coverage in the event a loss exceeds the association's policy limits.